Monday, 28 November 2016

OVER A BARREL: THE START OF A NEW RESOURCE GIVEAWAY?

Inflation
exposed the Upper Churchill contract as a “sell-out”. With Newfoundland’s
unemployment rate exceeding 20% in the late 1960s, the Smallwood government chose
jobs rather than risk Quebec Hydro walking away from the massive project. They made
not a single demand — not even a royalty from the grant of water rights.

That is one
aspect of a history of resource giveaways. I will note one more — in case you
think Hydro Quebec wants to be your friend.

BRINCO was
the developer of the Upper Churchill. Hydro Quebec’s strategic and persistent delays
in signing a power purchase agreement (PPA) with the company — during which time
it spent millions in pre-construction costs — had it facing bankruptcy. The
company behaved unwisely, to be sure. They listened to Hydro Quebec’s good-faith
claims and ran out of cash.

With Hydro
Quebec holding a gun to its head, an additional 25-year extended contract was wrung out of
BRINCO at an even lower price than it had negotiated for the first 40 years.
Even ancient Rome experienced inflation. But any reflection of such an economic
norm was suppressed in the feeding frenzy visited upon a far too trusting business
partner.

Newfoundland
and Labrador nationalized BRINCO in 1974. The 65.8% of the company not owned by
Hydro Quebec is now an asset of this province. We get the paltry returns which
BRINCO was forced to accept.

Similarly,
repeated efforts to redress the water rights issue and an egregiously one-sided
contract, interpreted under Quebec law and by Quebec courts, have all come to
naught.

On one level,
we have only ourselves to blame. The Newfoundland legislature granted those
water rights to Quebec on rotten terms. We also forced BRINCO to sell its
shares to the Crown with the full knowledge that the return on the investment
would be small.

We have not
been good stewards of either our resources or our money.

Quebec now
says it is ready to “bury the hatchet” on hydro. More likely, it see an
opportunity to sink the hatchet deeper. Hydro Quebec smells blood. How could
they not?

In 1968,
Hydro Quebec put a ‘gun’ to BRINCO’s head. The difference, this time, is that Nalcor
is holding the gun — and the gun is pointed at us.

For islanders, even the imperative of need for the
power is absent. With most of the power going to Nova Scotia for a price
calculated somewhere between zero and a pittance, we are chiefly left with the
bill.

Calls to put
the project “on ice” pending a full review to determine the extent of its lack
of feasibility have gone unnoticed. As the aboriginal groups have confirmed,
the price of attention is incarceration and a visit with the Judge.

Nalcor is in
a terrible bind. Unlike Smallwood, who didn’t put a dime into the Upper
Churchill, our crown agency has a mess on its hands that threatens — along with
the deficit — to undermine the fiscal integrity of the province. Its incompetence
is exposed daily. Even the
survival of a clumsy and frequently dishonest Ball Government is threatened.In
short, Nalcor is incapable of the objectivity needed to protect the province’s
interests in any negotiations with Hydro Quebec.

Let's take a look
at the things Nalcor (and the government) badly needs. They include:

An entity with
the management and technical expertise to take over and complete theproject.

An entity willing to underwrite at least one-half of Muskrat’s capital cost. (Engineers warn that the multiplicity of technical
issues, like the leaky cofferdam, will accelerate into the project’s latter
stages. We are a long way from trying out those China-manufacturedturbines. This
is a project whose final cost is easily heading for $15 billion.)

A water management
agreement that provides for electricity trading with the UpperChurchill
project.

And — not to
be taken lightly — Nalcor needs a cover-up of the final cost of its management
incompetence, in order to prevent massive public protest and a public inquiry (in the absence of a rescuer) when the power bills arrive.

Hydro Quebec
can meet some or all of those requirements.

The only
question is: what are Newfoundlanders and Labradorians prepared to pay for relief on their electricity bills? What are they prepared to pay Nalcor to permit an eternal cone of silence over the whole project?Put
another way, what do we have to trade with Hydro Quebec to have them relieve Nalcor
and the government from all this misery — bearing in mind that we are the ones ‘over
a barrel’?

Quebec Hydro
is a powerful, experienced, and profitable utility. While it exhibits
uninhibited ruthlessness, it displays unusual discipline. It is not given to the kind recklessness, inexperience, and naivete displayed by Ed Martin and Gilbert Bennett. It thinks and plans long-term. It is
truly a formidable company.

Likely, the
very thing Hydro Quebec doesn’t want is Muskrat Falls — but without it there would be no need to talk.

What, besides Muskrat Falls, would Nalcor want to put on the table for trade? They include:

More water rights and the right to develop Gull Island, which has a potential generatingcapacity of 2200 megawatts — nearly three times that of Muskrat Falls, and with far fewer technical challenges.

The interest
in the Labrador Island transmission line that Emera does not already own(though
Nalcor has already given Emera the right to first dibs on any further sale.)

The Power
Purchase Agreement with NL Hydro for Muskrat Falls power — that’s the one that
legally entitles Nalcor (or a purchaser or assignee) the right to levy onto
your power bills the full cost of the Muskrat Falls project.

An extension
to the 25-year Upper Churchill renewal contract. (Quebec has already seen how
quickly 40 years flies by.)

The
financial implications — for the public of this province — of any or all of those
options are vast.Will the public allow the Government to sellout again, relieving it of the impending political economic fallout associated with its decision to support this project?The public will now have to come to grips with that question. A scapegoat won't do — unlike the Upper Churchill Muskrat isn't so much about opportunity cost — the pain of those bills will be personally felt every single month for the next 50 years.Doesn't this more modern public claim to be better educated and enlightened than the dolts who presided over the Upper Churchill fiasco?

People will need to get engaged soon. We know what Nalcor will do. But with Premier Ball engaging our avaricious neighbour on their terms— we should all begin to feel naked!

This is a chilling summary of the state of affairs now facing the helpless populace who continue being denied democratic oversight or any transparency. All the while Nalcor continues playing with the "house money" that the helpless chumps must keep putting up for 57 years, not 50.

Will the chumps remain passive while they continue to be fed BS in the dark? Who will demand the Nalcor house be fumigated and the rats disposed of? Who will demand the part time leader at Nalcor open the books and demonstrate the competence and honesty of the contractors?

Once again the aboriginal groups are ignored in any discussions and their culture and food supply are bargained away without concern. Is patronizing colonialism still the prevalent attitude?

All in all this is a disgusting demonstration of third world politics at it's most sleazy.

"The NL legislature granted those water rights to Quebec on rotten terms..." Uncle: Just a small correction here. The water rights of the WHOLE Churchill river had been already given away (for peanuts) in 1961 to CF(L)Co (then 100% owned by BRINCO) for 99 years! So those water rights (including CF) were gone already, given for free to a consortium of British companies. So BRINCO (NOT HQ) actually is the one that got for free those water rights!

I just find curious, that nobody in NL is furious/irate/enraged that, in 1961, we gave away the water rights of the whole Churchill River (not just CF) for 99 years, to a non-Canadian, British private corporation - BRINCO!!! And now, we keep vilifying / crucifying our Canadian neighbour, Quebec, for having signed that 1969 contract with BRINCO (not NL)! ==> Inflation / deflation clauses were PURPOSELY NOT INCLUDED in 1969, as it was commonly believed that electricity prices would decrease due to new “more efficient” nuclear plants. (BRINCO could not afford a decrease in revenues while having big monthly payments). ==> Also, HQ could have walked away (like it actually did a few years earlier) if prices were higher than it next hydro project, waiting in line (in this case, James Bay, which was just slightly more expensive).

I think there are elements of history we conveniently ignore, forget, whitewash and/or revise.

It is important to remember that it was Mr. Smallwood who went to Europe and UK in 1953 seeking investors for Hamilton Falls and other projects. BRINCO was the result. One could argue that it was Mr. Smallwood's single-focused desire to have this project developed that ultimately led to the ill-fated contract.

Newfoundland never was, as Muskrat Falls has clearly shown, in a position to develop this project on its' own. It was Smallwood that sought out private interests to develop projects in NL. These same private interests, CFLCo, were granted a 99-year lease from Smallwood (I use the word Smallwood because there can be little doubt that he would have had the final say on the approval).

CFLCo could not finance this project on its' own and entered into negotiations with Hydro Quebec. The final agreement between CFLCo, a private company, and Hydro Quebec is what the people of NL call an injustice glossing over the enormous financial risk taken by HQ. The challenge of developing this project at that time has to be considered as well as the vested interests involved (HQ, CFLCo representatives, Smallwood).

If there is one glaring similarity between the past and now it would be that the single-minded desire for legacy (Smallwood & Williams) can have disastrous consequences; the former for lost opportunity and the latter for opportunity squandered.

If there is a "deal" with Hydro-Quebec to "develop" Gull Island, here's what will happen:

- every provincial Liberal will lose their seat.- if the deal is facilitated by the federal government, almost every federal Liberal will lose their seat.- depending on what Hydro-Quebec has to pay, and what Quebec-only projects get delayed, Couillard may not survive.- the Aboriginal peoples in Labrador, or at least two of them, will make this year's protests look like a birthday party.- Labrador separatism will be re-ignited like never before.- Probably Newfoundland separatism, too.

PCs were decimated in the last NL general election in no small part due to their fiscal incompetence, in which MF played and still plays a giant part of the problem.

Next gov should automatically call for a Royal Commission of Inquiry into Muskrat Falls, but the current gov supports MF 100% as did the previous gov.

I don't see the next PC leader being honest about the disaster MF has been because it was Danny Trump's pet project.

There was a deal with Quebec and Ontario to developed Gull Island in the early 2000s, but a certain megalomaniac wouldn't have it after govs switched. In fact his good friend Dean MacDonald resigned as NL Hydro Chair since Roger Grimes was thinking of signing the Gull Island contract.

Liberals sign a deal with HQ that actually lowers ratepayers bills from the outrageous 21.4c kWh in 2020 won't that ensure reelection?

Nalcor didn't have a strong leader in Ed Martin that would tell Danny how insane the "go it alone approach" to develop the much smaller and far riskier project (MF) was. Cabinet and backbenchers wouldn't say boo to Danny and people that didn't agree were branded traitors.

Royal Commission should look at the exhaustive search for Nalcor CEO/BOD appointments and the forming of the mega crown corp in the first place, precursor to MF.

MF has already received federal assistance through the FLGs ($7.9B or about 50% of the final cost) Quebec having to import less American peak winter demand because of Gull Island wouldn't appeal to its residents?

Ontario might once again be interested in Gull Island power as their peak power rate is 18c kWh mid-peak 13.2c off-peak 8.7c .

Any Gull Island project requires Nalcor to take a back seat in its procurement, management and construction - case in point Muskrat Falls.

"...There was a deal with Quebec and Ontario to developed Gull Island in the early 2000s..."

Gull Island would have been a money making project for everyone. But Danny did not want Quebec taking part in any of it. He would rather bankrupt NL by using the most expensive route bypassing Quebec, and built the smaller MF dam, unprofitable right from the beginning. His hate of Quebec seems to border insanity...

"An entity to take over and complete the project..." HQ might have the competence/capacity to achieve this (and saving costs), but it is not interested as MF will eventually "dump" (ie below costs)electricity in the US market, and depress US prices even further.

HQ would be in a conflict of interest in taking over MF completion. Any HQ actions/decisions would be meet with extremely high suspicions from NL. So, \tThat's a no go!

==> The only way out would be to sell HQ all the MF capacity (except the Emera block + a set Nfld block) for a fair pre-set price. HQ is the most well placed entity to manage efficiently MF operations/production, with its immense grid + reservoirs (including CF).

We have to remember that an agreement has to be WIN-WIN for both Nalcor, and HQ. Otherwise, forget it. Any future HQ discussions will only cover the 2041 deadline...

What did the British ever do but rob its colonies of its resources. In my area of Conception I have read that a small school started in 1839. I was just reading some history on Bermuda, which was colonized about 1619, just after Guys colony at Cupids, In Bermuda, schools were underway by the late 1600s, some 150 years ahead of us. Likewise land grants elsewhere was often hundreds of acres, here, in the mid 1700s to 1800, one acre lots for fishermen planters were the norm. We have been screwed for centuries by the British, and yet we still pay for the Royals to visit here. And we see the French from Quebec as out to do us in! Perhaps we should join the beautiful province if we are to become the happy province. Consider electricity rates of 7 cents instead of 21.4. Sign me up. Or I suppose I could wait 57 years for Muskrat t pay its debts, if ever. And Quebec roots out corruption at times. We just continue to hide it.

The biggest colony-robbers, the biggest screwers-for-centuries, the biggest doers-in, the most corrupt of all... are the colonialist Newfoundland overlords, who should be drove out of Labrador once and for all.

BRINCO actually owned the WHOLE Churchill River water rights for 99 years - Churchill Falls, Muskrat Falls, Gull, and anything in between.

BRINCO was the contracting party in 1969, not NL, because BRINCO totally owned Churchill Falls rights. Period.

BRINCO was only nationalised in 1974. ==> If BRINCO had obtained a better price for CF (lets say 20 times more), NL would have then paid many $ Billions more to nationalise BRINCO in 1974. So no free ride possible here, either. PERIOD.

BRINCO is the one that lost out here, NOT NL! Due to unforeseen energy inflation (as opposed to an expected energy deflation as it was believed in 1969), yes HQ gambled, made a fortune. Who cares!!!

Similarly, if HQ had walked away and built James Bay earlier instead, it would have saved a bundle of $ by totally escaping end of 1970s / beginning of 1980s construction inflation years. (And NL would not have CF for free in 2041).

For more precision; if HQ had walked away and built James Bay earlier instead, James Bay would have been the same huge bargain hydro facility that CF currently is. (by totally escaping construction inflation years). And HQ would not have to manage a troublesome/tricky CF contract, and all the useless/costly court cases.

CF could (maybe, if KW selling prices were cheaper than HQ alternatives) have been built later, at double or triple construction costs, as it would have fully faced the construction inflation years.

I have a relative who works with an accounting company. Apparently Muskrat was not much of a topic before Marshall announced what a boondoggle it was. Now, they say most Nflders realise what only a few were saying originally, and that it is going to have a terrible impact.

Uncle...the first paragraph is factually inaccurate in that it was Brinco that signed the agreement. The Gov of Nfld did not and was not a signatory to the agreement. The Gov of Nfld did not have any financial risk, and it was substantial, on this project. Why is that important? Because it is a fact and the first paragraph makes it sound as if the Gov of Nfld was in the room negotiating. It is also the narrative that modern-day politicians use to garner nationalistic support.

Looking through the lens of hindsight is easy. While I agree inflation benefited HQ no one could have predicted the levels of inflation that occurred. It is also ironic that inflation (oil prices) also exposed the people of NL to the pie-in-the-sky vision of Williams and his band of useful idiots.

Listened to Ball on CBC TV saying:Him ans Stan were getting Muskrat back on track. On tract to what. he says we need projects that will pay for health , education etc, but Muskrat is doing the opposite, taking away from other services, while making interest payments the second biggest use of our tax dollars. He says that we need competitive electricity rates, and they are doing everything possible to mitigate high rates, like export sales. Well 7 billion wasted would drive rates to 16.5 cents, another 8 billion and rates needed is 22 cents or more, so, to keep rates in check, we will spend another 8 billion........and no worth while export sales for mitigation, and declining island electricity use. And that they are looking at everything to keep rates in check...EXCEPT .demand management, helping customers with efficiency improvements to reduce their energy consumption........... anything meaningful in that area (as other jurisdictions do) is off the table, because the business case for MF is to increase demand and energy consumption. But customers are not stupid and are and will step up electricity use reduction. This is common sense that Ball and Stan seem deficient in.

Your flawed logic is that you assume that the more you reduce energy sales the more they will increase rates. Same as assuming the more you reduce purchase of beef the more they will charge for beef. Nalcor and governments logic is that they have consumers over a barrel and will use just as much (or almost as much) electricity at any price.They assume a price of 15.5 cents will result in a elasticity effect going from 0.2 to 0.3, so a modest decrease. They may be low on this 0.3 figure (Vardy suggests 0.5, and it may be higher) but rates of 22 cents will cause a drastic drop off in sales. For that reason, I believe rates will not be above 16 or 17 cents regardless of the need for 22 cents or more. The burden will be loaded to income tax , or other service reductions. Point being that one might argue that demand reduction is counter productive. True , demand reduction is inconsistent with Muskrat. But if there is considerable demand reduction and they accept that there will be such demand reduction, that it would make sense not to waste another 8 billion on this boondoggle, then demand reduction is our friend. If there are little if any profitable export sales, and also reasonable certainity that there will be a large demand reduction on the island, then this boondoggle continues and worsens. Demand reduction and putting Muskrat on ice , as Uncle Gnarley suggest,is the only way to limit the exposure to more debt and reduction of services and increased taxes. Even Ball say rates need to be competitive, so they will not increase beyond what people can afford. If competitive rates was considered prior to sanction, sanction would never have occurred. So they are now in denial with the view that we are too far in to turn back. That continued waste assures more , not less, demand reduction will occur. Well, my confidence rate, that there will be a very large demand reduction is at least 95 percent. And the fact that demand reduction has been a corner stone of other jurisdictions to keep customers costs in check is not accidental. Here it is a foreign concept! How can there be such ignorance as to what others are doing.

As I understand it, the total annual energy output of MF is approximately 4.8 terawatt hours(twh). It was reported by media in early November that the previous government and Nalcor had agreed to give Emera fully 1/3( approx. 1.6 twh ) of this energy for a period of 35 years for building the 1.6 billion dollar Maritime Link, a bargain for sure! That leaves 3.2 terawatt hours of which up to another approximately 1/3( 1.6 twh ) could be sold in Nova Scotia for market rates. I understand that the Maritime link is designed to carry 2/3 of the MF output. Up to the remaining 1.6 terawatt hours could be used in Labrador which could then free up a quantity of up to the energy equivalent of the 300 Megawatts of available recall power from the upper CF plant to be sold through existing arrangements already in place with Emera and HQ by wheeling this power and energy over the Hydro Quebec system to the maritimes. This could reduce the requirement for tax revenue being used to subsidize rates to keep them affordable to residents and competitive for businesses. The foregoing assume MF can be completed to hold water and thereby produce power and energy.

Actually, Nalcor may wheel thru a bigger amount of power (from MF) over HQ system if it wishes so => as long as HQ's 3 existing 735kv power lines HAVE enough spare capacity at the time (obviously, not so much during the winter peak).

In northeastern US/Canada, there are agreements in place to ensure that fair - pre-set - fees are paid when using anyone's grid for export.

Totally agree with you that CF recall power has been capped at 300 MW, even when we know that CF provides more power than expectations). => I was talking about some of the future Muskrat production.

HQ will accommodate Nalcor (for a pre-set fee) if it needs to wheel thru power to Emera or export (if its power lines have the spare capacity at the time)

For the last few years, Nalcor has been using HQ grid to export some/all of its CF recall power. (Even when there was no provisions in the CF 1969 contract forcing HQ to do so. Further, HQ gave Nalcor a break some years ago, by waiving the advance warning period required for Nalcor to use that 300 MW recall power)

Following the 1998 framework agreement of the Tobin/Bouchard initiates, the 3 year notice period for recall of the unused portion, approx. 130MW, of the 300 MW provided for in the infamous 1969 contract was waived as part of other agreements including the increased capacity agreement known as GWAC and the shareholders agreement.However, please give us a break, the record to date shows that HQ has steadfastly shown itself to be incapable of giving us the break we need and deserve, and that is a fairer share of our resource!

Former Prime Minister Brian Mulrooney said in a speech in Quebec circa 1981, " The present contract between Quebec and Newfoundland for electric power from Churchill Falls does not reflect in any way the new economic and energy realities that have developed since the OPEC crisis" He also said, "The inequality and absence of fair play in the contract in question is obvious. Simple decency and the most elementary spirit of justice demand its immediate renegotiation." Simple decency and the most elementary spirit of justice has not been displayed by HQ at the required level to this day but hey, never say never!

Lets say it would be the otherway around, that Nfld would own 95% of the James Bay production until 2041 under the same terms; do you believe one minute that Nalcor would be more generous? (=>Now, had a situation where Québec had annexed part of Nfld + the Gulf of St-Laurence)

Let's say the CF contract were the other way round and benefitted NL by an indecent amount because of events beyond anyone's control. I believe it would have been resolved fairly, long ago and resolved tout suite!

Ok, lets say CF construction costs had doubled (like for MF...); HQ was totally on the hook for any such increases. It would have had to bail out BRINCO/CFLCo big time (Nfld would not have touched that BRINCO/HQ private affair, believe me)

Lets say elecricity prices had crashed (like it did for MF...). HQ would be on the hook to pay for that electricity no matter what - or BRINCO/CFLCo would have sued the hell out of HQ AND Québec! (Nfld would not get involved in this BRINCO/HQ private mess either)

In 1974, Nfld would not have nationalized BRINCO if it would have brought any financial loses or risks. So no help for HQ here either...

==> So no, there are no ways that Nfld would have helped HQ or Québec if CF had failed or went unprofitable <==

HQ took alone all the risks (plus constructed a huge/costly/risky 735kv grid for this project) without any cents from Nfld.

But, hey! Keep the Quebec bashing, it feels so much better (to fault the others of your own mess). Forget any win-win proposals with HQ; they ow us the moon, so make them pay!!! In the meantime, lets go bankrupt with MF, we know better!

Then we should include the Québec Act of 1774 as well, where Quebecers agreed to not side with the american - to kick anything british out of North America (=> With this continious "love" from Canadian, maybe that was not such a wise decision afterall)

1774 Québec Act:

-The province's territory was expanded to take over part of the Indian Reserve, including much of what is now southern Ontario, Illinois, Indiana, Michigan, Ohio, Wisconsin, and parts of Minnesota.

-Reference to the Protestant faith was removed from the oath of allegiance.

-It guaranteed free practice of the Catholic faith.

-It restored the use of the French civil law for matters of private law, except that in accordance with the English common law, it granted unlimited freedom of testation. It maintained English common law for matters of public law, including administrative appeals, court procedure, and criminal prosecution.

About Des Sullivan

Uncle Gnarley is written by Des Sullivan, of St. John's.
He is a businessman engaged in real estate, retail and development companies.
A Director of Sullivan Capital Corporation, he is a former Executive Assistant to Premier's Frank D. Moores (1975-1979)and Brian Peckford (1979-1985).
He also served as a Part-Time Board Member on the Canada-Newfoundland Labrador Offshore Petroleum Board (C-NLOPB).
Uncle Gnarley permitted the use of his highly regarded name provided he could have full access to state his own rather unequivocable opinions. (A more detailed Profile of Uncle Gnarley is described in the very first Post entitled "Uncle Gnarley is alive and well" found on this site.
Sullivan is a firm advocate of sound fiscal management by the provincial government and intends to use this Site as a forum for commentary on the major issues of the day. Says Sullivan, "Newfoundland and Labrador inspires debate on a variety of issues, a veritable Muskrat Falls of opinion".
Readers are invited to leave their opinions, too.
Uncle Gnarley will post every Monday, and more often as events warrant.